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The Price of Value
Dr. Peter GrafEVP Solution Marketing, SAP
October 11, 2005
SAP AG 2005, SoftSummit Keynote / 2
"I can't change the fact that my paintings don't sell. But the time will come when people will recognize that they are worth more than the value of
the paints used in the picture."
Vincent van Gogh
SAP AG 2005, SoftSummit Keynote / 3
The Value of “Paint”
Perpetual license Named or concurrent user licenses
Maintenance Single vendor or multi-vendor maintenance
Transaction Pay as you go, “Utility” pricing
Free software Charge for services and support and/or monetize partner relationships
Subscription Rent-to-buy option
TODAY’S PRICING MODELS MOSTLY IGNORE THE BIG PICTURE VALUE
SAP AG 2005, SoftSummit Keynote / 4
“Many organizations have embraced the rental approach, but fail to evaluate the full financial
impact of rental licensing over a multi-year period and the negative effect of the lock-in. Most orgs
that have a number of years’ experiences with this model are generally dissatisfied and often try to
return to perpetual models.”
Gartner Group
SAP AG 2005, SoftSummit Keynote / 5
Are We Looking At a Perfect Storm?
Promised value not delivered Customer perception of the value of software has evolved
Technology dynamics E.g. open source, SOAs, virtualization, RFID
New delivery models E.g. Software as a service & utility computing
Shareholder pressure Vendors need more predictable revenue streams and thus drive for more
compliance of street prices to terms and conditions
Risk mitigation Customers drive for predictable, simple, flexible licensing models
Courtesy: IDC Insight 2005; A. Konary
A COMBINATION OF FORCES THAT POTENTIALLY ALTER LICENSING
SAP AG 2005, SoftSummit Keynote / 6
"The cynic knows the price of everything and the value of
nothing"
Oscar Wilde
SAP AG 2005, SoftSummit Keynote / 7
How Do We Create Value?
Factor inFactor inMarketMarket
DynamicsDynamics
AddressAddresscustomers’ customers’ biggest painbiggest pain
Apply innovationApply innovationto deliver uniqueto deliver unique
solutionssolutions
INNOVATIVE SOLUTIONS THAT ARE DIFFERENTIATED IN THE MARKETAND HELP CUSTOMERS IMPROVE THEIR BUSINESSES
VALUE
SAP AG 2005, SoftSummit Keynote / 8
Top 4 Drivers of Mega Trends
Macroeconomic changes
Evolving customer
needs
Technology innovation
Softwareindustry
structure
• Business environment changes customer priorities• Economic changes size the software market
• New technologies address latent or current needs
better/cheaper than current alternatives
• Changes in industry concentration, competitive behavior,
industry value chain and economic model that creates
new go-to-market options
• Changes in customer business affect how they prefer to
consume business technology and related services
Types of trends triggered Drivers
New
opportunities
in enterprise
software
SAP AG 2005, SoftSummit Keynote / 9
Mega Trends 1995-2010
1. Macro economic
changes
2. Change in customer
needs
3. Technology innovations
4. S/w industry structure
2005-2010Flexibility & Time to value
2005-2010
• Compliance • Operational flexibility • IT spending keeps pace with
GDP
• Industry-specific processes• Compliance and risk mgmt • Contextual usage • IT value ethic : time to value • CIO - Chief Process
Innovation Officer• LOBs push their priorities• Applistructure and ESA • Grid and virtualization
• Co-innovation & ecosystem
based competition • New pricing models • New deployment models • Competition from BPO
Disillusionment - Keeping thelights on 2000-2005
• Focus on consolidating the
core & operational efficiency• IT spending flat, trails GDP
• Consolidation &
standardization• IT value ethic : ROI • Centralization of IT under CIO
• No major change in
architecture • Standards adoption: J2EE,
Linux• App. innovation stagnates• Industry consolidation begins• Community led development
• Start of globalization era • Dot.com bubble • IT spending bubble
• Internet • 3-tier client server with web
front ends
• Innovation by start-ups • Pricing model – perpetual
license and maintenance
• Cross-industry transactionalsystems
• Internet-enablement • No strong IT value ethic• Laissez faire, full autonomy
to LOBs
Internet and IT gold rush 1995-2000
SAP AG 2005, SoftSummit Keynote / 10
Source: Bureau of Economic analysis and CSFB
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Y-Y
Gro
wth
SAP R/3
Windows 3.0
Windows 95 released,Client/Server takes-off
Bubble Bursts:1) Spending Freezes2) Budgets Scrutinized
Netscape IPO Back to Reality:1) Spending Rationalization2) Consolidation3) Centralization
Next Big Thing??? 1) SOA2) Virtualization3) OnDemand4) RFID
Internet Bubble
Y2K
LOW GROWTH TRANSITION PERIOD ‘TIL SOA INFLECTION POINT
Are We Going Back to the Good Days?
SAP AG 2005, SoftSummit Keynote / 11
Enterprise Services Architecture (ESA)
Business viewProductivity with best practices
Ability to differentiate your business (co-innovation)
Flexibility to do both on one platform
Technology viewEvent-driven
Model-based
Services-oriented
SAP NetWeaverEnterpriseService
Repository
SAP, partner &custom xApps
Existing Systems
Portal Devices Office RFID
A BLUEPRINT FOR IT POWERED BUSINESS INNOVATION
mySAP
SAP AG 2005, SoftSummit Keynote / 12
Automation for efficiency is assumed and delivered through multiple channels
Business transformation is the next goal via new architecture, platform, and ecosystem innovation
Greater link between value and price
Mix of delivery and pricing models reflect value delivered
2015
Phase 2
Business software closes the gap with business
Point solutions purchased by LOB vs. IT evolve into process orientation
Market begins to link price to value
User-based & process-based (business metric) pricing
2005
Phase 1
Next in Software Pricing: Aligning Value with Pricing
Business software viewed as technical modules
Relegated to back-office; remotely linked to business
Minimal link between pricing and value
CPU-based pricing, concurrent user
Late 1990s
Phase 0Value
Price
SAP AG 2005, SoftSummit Keynote / 13
IDC on Value-Based Applications Pricing
Human Resources
Industry-Specific Software
Accounting
Payroll
Salesforce Automation
Workforce Management
Marketing Automation & Customer Support
Product Lifecycle Management
0 10 20 30 40 50
(% of Respondents)
1 – 99
100 – 9,999
10,000+
Total
Co. Size by Number of Employees
Enterprise Applications for Which Value-Based Pricing isMost Appropriate by Company Size
SAP AG 2005, SoftSummit Keynote / 14
SAP Case Study
Determine Pricing Model
“Value Capture”
SelectPricingMetrics
for IndustrySolutions
CompareValue ofSAP vs.
Next BestAlternative
Set & ValidatePricing Level
based onDifferentialEconomic
Value
Determine Pricing Model
“Value Capture”
SelectPricingMetrics
for IndustrySolutions
SelectPricingMetrics
for IndustrySolutions
CompareValue ofSAP vs.
Next BestAlternative
CompareValue ofSAP vs.
Next BestAlternative
Set & ValidatePricing Level
based onDifferentialEconomic
Value
Set & ValidatePricing Level
based onDifferentialEconomic
Value
Quantify Value Drivers
“Value Creation”
DefineIndustry
EconomicProfiles Define
Value Driver
Structureand KPIs
Bundle &Prioritize Scenarios
forEconomic
Profiles
Quantify Value Drivers
“Value Creation”
DefineIndustry
EconomicProfiles
DefineIndustry
EconomicProfiles Define
Value Driver
Structureand KPIs
Define Value Driver
Structureand KPIs
Bundle &Prioritize Scenarios
forEconomic
Profiles
Bundle &Prioritize Scenarios
forEconomic
Profiles
FROM VALUE DRIVERS TO PRICING MODEL
SAP AG 2005, SoftSummit Keynote / 15
SAP Case Study
IM&
C In
du
stry
Product-based Focus
Service-based Focus
Does the customer rely primarily on products or services to drive profitability?
Low CostIs operational efficiency & lowest cost focus driving strategy?
Low CostIs operational efficiency & lowest cost focus driving strategy?
Product Innovator
Is innovation and new product introduction driving strategy?
Product Innovator
Is innovation and new product introduction driving strategy?
Component Specialist
Is the product portfolio largely comprised of inputs and components?
Component Specialist
Is the product portfolio largely comprised of inputs and components?
Segment Specialist
Are the products considered finished goods with complex BOM for a narrow customer segment
Segment Specialist
Are the products considered finished goods with complex BOM for a narrow customer segment
Solution Provider
Is pre-sales support and consulting used heavily to craft a customized, up-front product configuration?
Solution Provider
Is pre-sales support and consulting used heavily to craft a customized, up-front product configuration?
Downstream Champion
After sales support & service agreements define strategy and competitive advantage
Downstream Champion
After sales support & service agreements define strategy and competitive advantage
UNDERSTANDING CUSTOMERS’ ECONOMIC PROFILES
SAP AG 2005, SoftSummit Keynote / 16
SAP Case Study
Increase Revenue/Margin
• Better products
• Quicker to market
• Broader availability
• Reduce downtime
Reduce Operating Cost
• Cost to design network
• Cost to maintain and operate network
• Cost to develop products
• Cost to sell and fulfill
• Cost to bill and collect
• Cost to assist customers
• Cost of overhead and support functions
Improve Asset Efficiency
• Reduce capital expenditures
• Reduce working capital
• Improve capacity utilization (fixed asset utilization)
Sources of Value
IDENTIFYING CUSTOMER VALUE DRIVERS
SAP AG 2005, SoftSummit Keynote / 17
META Recommendations
Large commercial users should:Exploit the capabilities and interfaces that are enabled by the application infrastructure services from major players (IBM, MSFT, SAP, ORCL, and BEA) to build/assemble their next generation applications
Small packaged application providers should:a) Select one of the leading infrastructure services vendors as a "partner," and build their business applications to this environment
b) Focus their efforts on capturing more specific business processes versus a major infrastructure software investment
Pricing implications for new customer usage and partnerdevelopment and licensing
SAP AG 2005, SoftSummit Keynote / 18
The Growing ISV Ecosystem
SAP AG 2005, SoftSummit Keynote / 19
Strategic Pricing Planning Assumptions
Applications will be licensed as (end-to-end) business processes, not just as functional technology components E.g., ‘prospect to cash’ or ‘order to delivery.’ are better ways to sell to
business, rather than IT executives.
The value of software depends on industry and economic profile of the customer
Non-value based pricing will get under pressure Customers staying on a CPU based licensing model will have their software
costs increase by 50%+
Concurrent user pricing will disappear
Utility-based pricing models will take longer time to mature Gartner: The offerings to date are all billing variations on traditional licensing
models
SAP AG 2005, SoftSummit Keynote / 20
SAP Perspective on Future Direction
Enterprise applications will be split Assets
Core processes
Innovation-driven
Need to “own” even if run by 3rd-party
Services Context processes
Efficiency-driven
ESA is the architecture that cohesively reconciles these different models
Composition platform ties all of the above into a flexible business platform
SAP AG 2005, SoftSummit Keynote / 21
"Try not to become a man of success, but rather try to become a man of value"
Albert Einstein
The Price of Value
Dr. Peter GrafEVP Solution Marketing, SAP
October 11, 2005